Kroger 3Q Profit Dips But Tops Wall Street's View

MICHELLE CHAPMAN & SARAH SKIDMORE | AP Business Writers

Kroger Co. says its customers are feeling increasingly stressed as they face pressure from both the weak economy and higher food costs.

The grocery store operator managed to post a profit Thursday that beat Wall Street's expectations and it raised its full-year forecast. However, Kroger said cost inflation and the economy have had a harsher impact on the overall operating environment than it expected. Some shoppers are struggling to stretch their limited grocery budget further and as a result, are buying less each visit, opting for smaller packages and switching to store brands.

"When you consider that household income has remained stagnant for the past year – in fact for the last several years – some shifting in purchasing behavior is understandable," said Rodney McMullen, Kroger's president and chief operating officer. "This is one of the reasons we embarked upon the strategy we did several years ago."

Kroger has managed to maintain its popularity and profitability amid this pressure by increasing its emphasis on low prices and loyalty programs, which offer its most frequent shoppers discounts on fuel and their favorite items. It also has put a heavy emphasis on cost-control in its operations.

The company, which operates Kroger, Ralphs, Fred Meyer and other grocery chains, reported that its net income dipped to $195.9 million, or 33 cents per share, for the period ended Nov. 5 as it struggled with some higher costs of its own. That's down from $202.2 million, or 32 cents per share, a year ago.

The quarter included an inventory accounting charge of $61.6 million, which is much higher than a similar $11.5 million charge it incurred a year earlier. There were fewer shares outstanding in the current quarter.

The results beat analysts' expectations for earnings of 31 cents per share on revenue of $20.4 billion, according to a FactSet survey.

Like many grocers, Kroger has been dealing with rising costs that it has passed along to consumers as suppliers have increased prices for meat, product and other goods. Kroger said costs rose 6 percent for the quarter on food and other items in its stores excluding fuel.

Consumers across the board are struggling with these increases but have adapted, being more cost-conscious in their shopping by sticking to lists, using coupons and more.

Kroger has put a heavy emphasis on everyday low prices to attract these shoppers but says it will continue to pass along higher costs as needed.

The company's popularity has remained strong as it saw the number of shoppers in its stores grow during the period. Kroger reported that revenue at supermarkets open at least a year gained 5 percent, taking out fuel. The company said that it is the 32nd straight quarter that the figure has increased. This metric is a key measure of a retailer's performance because it excludes results from supermarkets recently opened or closed.

Kroger said that based on its consistent growth, it now expects full-year earnings of $1.95 to $2 per share, up from a previous outlook for earnings between $1.85 and $1.95 per share. Analysts predict earnings of $1.95 per share for the year.

The company also boosted the low end of its guidance for revenue from supermarkets open at least a year. Kroger now anticipates a 4.5 percent to 5 percent increase for the year, excluding fuel. Its prior forecast called for the figure to rise 4 percent to 5 percent.

Kroger, based in Cincinnati, operates more than 2,000 supermarkets and multi-department stores nationwide as well as a chain of convenience stores, jewelry stores, fuel centers and 40 food processing plants.

Skidmore contributed to this report from Portland, Ore. Chapman contributed from New York.

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